System and method for simultaneous trading of options

ABSTRACT

A method and system for facilitating trading of equity and index options is provided. The system incentivizes market makers to voluntarily agree to restrict the bid/offer spread on price quotes for options by enabling the market makers to submit batches of bids and offers simultaneously. The system also provides protection to the market makers by enabling withdrawal of certain bids and offers if a cumulative delta on traded options has been exceeded. The system also provides limits on the rates at which individual traders and the overall market submit bids and offers. The system provides summarization of market data to enable market makers to have relevant and timely data at all stages. In this manner, the system achieves increased liquidity of the equity and index options markets.

BACKGROUND OF THE INVENTION

1. Field of the Invention

The present invention relates to the field of financial markets. Moreparticularly, the invention relates to the electronic trading of optionsproducts.

2. Related Art

Volatility and uncertainty are ever present in today's financialmarkets, especially in the equity markets. In the face of this type ofuncertainty, treasurers and fund managers are increasingly advised toconsider methods of managing their exposure to sharp movements in thefinancial markets. Equity and index options can provide the flexibilityand security required.

Treasurers, fund managers, and other market participants have a numberof choices available to them to help them manage their equity exposure.These choices include exchange-traded products, such as futures andoptions contracts, or over-the-counter (OTC) products, such as swaps,Forward Rate Agreements (FRAs), caps, and floors together with theunderlying cash market products themselves. Successful players intoday's volatile markets will typically employ the full range ofavailable risk management and trading strategies.

Exchange traded futures and options contracts offer market participantsnot only a high degree of versatility in their use, but also significantadvantages as strategic instruments, especially when complemented by OTCderivative and cash market financial instruments. Indeed, when usedeffectively, exchange-traded futures and options contracts, inconjunction with cash market and OTC derivative instruments, can enhancereturns, reduce risks and manage equity risks with greater certainty,precision and economy.

Retail investors typically prefer to deal directly on an exchange, asopposed to OTC, because they know that exchanges are bound by certainrules and regulations, and because most retail investors do not haveaccess to the OTC markets. With respect to derivatives, the most likelyproduct group to attract retail investors is equity and index options.This is because, provided that the product groups are understood, thecost or “loss” from any transactions can be understood at the outset.

However in order to attract retail investors to the equity and indexoptions markets, clear, transparent and reliable market data must bemade available, via a variety of sources. Many electronic equity andindex option markets suffer from the problem of “blank screens”, wheremany option series fail to be continually populated with representative“bids” and “offers”. The present invention includes features that areintended to address this shortcoming of conventional trading systems.

An option is an instrument that gives its holder the right, but not theobligation, to buy or sell something at fixed price. Options areavailable on a wide range of products, literally from pork bellies toplatinum. For example, Euronext.LIFFE lists options on interest ratefutures, government bonds, commodities, and individual equities. Inaddition, Euronext.LIFFE lists a number of index options products,including the FTSE 100 Index, the CAC 40 Index, the BEL 20 Index, theAEX Index and the FTSE Eurofirst 80 and 100 Indices.

Options offer investors the means to take advantage of individual shareprice movements and general stock market fluctuations. They may be usedin a number of different ways, including the following:

-   -   as a form of insurance against a fall in the price of a share or        in an index;    -   as a way of generating income from an existing shareholding; and    -   for straightforward limited risk speculation.

Options may be risky investments, and the degree of risk largely dependson how they are used. The buying of options involves a limited risk,i.e., the maximum loss is limited to the price paid for the option andtherefore is known at the outset. The selling, or “writing”, of options,although having a wide range of uses, is a potentially high-riskstrategy, requiring a high degree of product knowledge. Investors aretypically urged not to write “uncovered” options until they have athorough understanding of the implications.

There are two types of equity options: calls and puts. The buyer of acall option acquires the right, but not the obligation, to buy shares ata fixed price. The buyer of a put option acquires the right, but not theobligation, to sell shares at a fixed price.

Option information is carried in many national newspapers, and by quotevendors. Detailed information is laid down in the contractspecification. In the contract, information can be found about thecurrency in which the option is traded, the contract size (i.e., thenumber of shares the option refers to), and the option style (forexample, option can be exercised during its lifetime (American style),or only at the end (European style)). Price information is typically setout as shown in FIG. 1.

Each option contract has an expiry date, after which that particularcontract is no longer available for trading. When one option expires,another option that has a future expiry date is listed. The expiry datesavailable for trading are specified in the contract specifications. Formost options, the expiry dates available are fixed at three-monthlyintervals, and the most common cycles are:

-   -   January, April, July, October    -   February, May, August, November    -   March, June, September, December        For those options at any time of the year, three expiry dates        will be quoted for each option. For example, referring again to        FIG. 1, in November there will be equity options available on        Angus Toys, which is on the January expiry cycle, with expiry        dates in January, April and July. When the January options        expire, October options will be introduced, so that April, July        and October options will then be available.

The price at which an option holder has the right to buy or sell theunderlying security is known as the exercise price, or strike price.Exercise prices are typically set by the exchange. American-style equityoptions may be exercised on any business day up to and including thelast trading day. The term “exercise” refers to taking up the right tobuy or sell the underlying shares. When an option holder exerciseshis/her option, a randomly selected writer is notified of this and isrequired to deliver or take delivery of the underlying shares.

To buy an option, the buyer pays a sum of money, called the premium.Premiums are quoted in the currency specified in the contractspecifications. Equity options must be paid for, in full, on the dayfollowing that on which the transaction is entered into. This is knownas paying “premium up front”. Again referring to FIG. 1, an example isprovided in which, for simplicity, only one price is shown for eachoption. In practice, there will always be two prices quoted for eachoption, a bid and an offer price. For example, the January 240 calloption price could be quoted as 23-27. This would mean that, given thisoption would trade in pence, it would cost an investor 27p to buy thisoption and that the investor would receive 23p for selling it. Thepremium for the January 240p call option (i.e., the right to buy thenumber of Angus Toys shares as specified in the contract specificationson or before the option's expiry day in January, at a cost of 240p pershare) is 25p per share. Supposing that the contract size of Angus Toysoptions is 1000, then the cost of 1 contract would be £250 (i.e., 1,000shares at 25p/share). This is the amount payable, in full, by the buyerto the seller (i.e., writer) on the day following the transaction.

The value of an equity option contract is influenced by several factors,including the underlying share price, the time to expiry, volatility,dividends, and interest rates. The underlying share price, together withthe option's exercise price, determines the intrinsic value of anoption. For example, if the share price exceeds the exercise price of acall option by 20p, the option is said to have 20p worth of intrinsicvalue and to be 20p “in-the-money”. In the case of a put option, thereverse is true. A put option is in-the-money when the exercise priceexceeds the share price.

Time has a value, since the longer the option has to go until expiry,the more opportunity there is for the share price, and hence the optionprice, to move. Generally, the further away the expiry day, the higheran option's time value. This is true for both calls and puts. Referringagain to Table 1 above, the premium for the January 240 call option onAngus Toys increases from 25p for the January expiry to 35p for theApril expiry and to 42p for the July expiry. Therefore, if the paymentof the premium gives an investor the right to purchase stock at 240pwhen the current price is 254p, the option must be worth at least 14p(i.e., the difference between the current share price and the exerciseprice). This 14p is known as the option's intrinsic value. The remaining11 p of the total 25p premium is known as the time value. Assuming thesame exercise price, this will be greater for options which have alonger time to run until expiry.Premium=Intrinsic Value+Time ValueThe premium for the January 260 call option is 14p. This is because theexercise price, at 260p, is higher than the current underlying price of254p, so the call option has no intrinsic value. The premium in thiscase consists solely of time value.

Time value is also affected by how volatile the price of an underlyingshare has been in the past or is expected to be in the future. Morevolatile shares attract higher time value as profit opportunities foroption holders, and hence risks for option writers, are greater than forshares with more stable prices.

Dividends are paid to shareholders, but not to holders of options. Sincethe share price tends to fall by the amount of the dividend after it hasbeen announced, it follows that the price of an option will reflect thevalue of any expected dividend payments.

Interest rates also affect the price of equity options. However, changesin interest rates have a relatively small effect on option premiums.

Equity and index options may be traded by competitive face-to-face openoutcry on a trading floor of a market. However, in recent years, somemarkets have been automated to enable electronic trading of equity andindex options, and other financial products. Such markets may operate ina highly versatile, technological environment that offers members andend-users considerable flexibility in the way they choose to access themarket. Private investors and institutional users still access themarket by dealing through a broker.

In view of the current options market environment, the present inventorshave recognized the importance of providing timely and reliable marketdata to participants in order to provide an incentive for greatertrading activity. As described above, the present lack of timeliness ofsuch market data is exemplified by the “blank screens” problem.Accordingly, the present invention is intended to address this problem.

SUMMARY OF THE INVENTION

In one aspect, the invention provides a system for facilitating tradingof equity and index options. Each option is assigned to a class. Eachclass includes a plurality of predetermined series of options. Thesystem includes a server at which each option is actively traded, and aninterface in communication with the server. The interface is configuredto enable at least one of a bid and an offer for an option to beentered. The server is configured to receive bids and offers for eachoption via the interface. The interface is further configured to enablea first user to simultaneously enter a plurality of bids and offerswithin a single message, wherein the number of entered bids and offersis not greater than a first maximum, and wherein a quote for each bid oroffer is required to fall within a first predetermined range of valuesfor all series within the class. The interface is further configured toenable a second user to simultaneously enter a plurality of bids andoffers within a single message, wherein the number of entered bids andoffers is not greater than a second maximum, and wherein a quote foreach bid or offer is required to fall within a second predeterminedrange of values for a predetermined set of series within the class. Thepredetermined set does not include all series within the class. Theinterface is further configured to enable a third user to enter anindividual bid or offer within a single message with no restriction on aquote for the entered bid or offer.

The server may be further configured to automatically track a cumulativedelta for the first user, such that when a bid or offer entered by thefirst user results in a trade, a delta corresponding to the trade isadded to the cumulative delta. When the cumulative delta exceeds apredetermined delta limit, the server may be configured to enable thefirst user to withdraw all outstanding bids and offers that weresimultaneously entered by the first user. The server may be furtherconfigured to automatically track a cumulative delta for the seconduser, such that when a bid or offer entered by the second user resultsin a trade, a delta corresponding to the trade is added to thecumulative delta. When the cumulative delta exceeds a predetermineddelta limit, the server may be configured to enable the second user towithdraw all outstanding bids and offers that were simultaneouslyentered by the second user.

The server may be further configured to automatically restrict a rate ofentry of bids and offers by any user. When a rate of received bids andoffers from a user exceeds a predetermined limit, the server may beconfigured to reject an attempt by the respective user to enter anadditional bid or offer. The predetermined limit for an individual usermay be set at 100 messages per second. The server may be furtherconfigured to automatically restrict an aggregate rate of entry of bidsand offers by all users. When an aggregate rate of received bids andoffers from all users exceeds a predetermined limit, the server may beconfigured to reject an attempt to enter a bid or offer by any user. Thepredetermined aggregate limit for all users may be set at 10,000messages per second.

In another aspect, the invention provides a method of trading of equityand index options. Each option is assigned to a class. Each classincludes a plurality of predetermined series of options. The methodincludes the steps of enabling a first user to simultaneously enter aplurality of bids and offers for options assigned to the class within asingle message, enabling a second user to simultaneously enter aplurality of bids and offers for options assigned to the class within asingle message, enabling a third user to enter an individual bid oroffer for an option assigned to the class within a single message, andautomatically completing a trade by matching a bid to a correspondingoffer. For the first user, the number of entered bids and offers is notgreater than a first maximum, and a quote for each bid or offer isrequired to fall within a first predetermined range of values for allseries within the class. For the second user, the number of entered bidsand offers is not greater than a second maximum, and a quote for eachbid or offer is required to fall within a second predetermined range ofvalues for a predetermined set of series within the class. Thepredetermined set does not include all series within the class. For thethird user, there is no restriction on a quote for the entered bid oroffer.

The method may further include the steps of automatically tracking acumulative delta for the first user by adding a delta corresponding to acompleted trade whenever a bid or offer entered by the first user ismatched, and when the cumulative delta exceeds a predetermined deltalimit, enabling the first user to withdraw all outstanding bids andoffers that were simultaneously entered by the first user. The methodmay also include the steps of automatically tracking a cumulative deltafor the second user by adding a delta corresponding to a completed tradewhenever a bid or offer entered by the second user is matched, and whenthe cumulative delta exceeds a predetermined delta limit, enabling thesecond user to withdraw all outstanding bids and offers that weresimultaneously entered by the second user.

The method may further include the step of automatically restricting arate of entry of bids and offers by any user by rejecting an attempt bythe respective user to enter an additional bid or offer when a rate ofreceived bids and offers from the user exceeds a predetermined limit.The predetermined limit for an individual user may be set at 100messages per second. The method may also include the step ofautomatically restricting an aggregate rate of entry of bids and offersby all users by rejecting an attempt by any user to enter an additionalbid or offer when an aggregate rate of received bids and offers from allusers exceeds a predetermined limit. The predetermined aggregate limitfor all users may be set at 10,000 messages per second.

In yet another aspect, the invention provides a storage medium forstoring software for facilitating trading of equity and index options.Each option is assigned to a class. Each class includes a plurality ofpredetermined series of options. The software is computer-readable. Thesoftware includes instructions for causing a computer to enable a firstuser to simultaneously enter a plurality of bids and offers for optionsassigned to the class within a single message; enable a second user tosimultaneously enter a plurality of bids and offers for options assignedto the class within a single message; enable a third user to enter anindividual bid or offer for an option assigned to the class within asingle message; and complete a trade by matching a bid to acorresponding offer. For the first user, the number of entered bids andoffers is not greater than a first maximum, and a quote for each bid oroffer is required to fall within a first predetermined range of valuesfor all series within the class. For the second user, the number ofentered bids and offers is not greater than a second maximum, and aquote for each bid or offer is required to fall within a secondpredetermined range of values for a predetermined set of series withinthe class. The predetermined set does not include all series within theclass. For the third user, there is no restriction on a quote for theentered bid or offer.

The software may further include instructions for causing a computer totrack a cumulative delta for the first user by adding a deltacorresponding to a completed trade whenever a bid or offer entered bythe first user is matched. When the cumulative delta exceeds apredetermined delta limit, the software may further include instructionsfor causing a computer to enable the first user to withdraw alloutstanding bids and offers that were simultaneously entered by thefirst user. The software may further include instructions for causing acomputer to track a cumulative delta for the second user by adding adelta corresponding to a completed trade whenever a bid or offer enteredby the second user is matched. When the cumulative delta exceeds apredetermined delta limit, The software may further include instructionsfor causing a computer to enable the second user to withdraw alloutstanding bids and offers that were simultaneously entered by thesecond user.

The software may further include instructions for causing a computer torestrict a rate of entry of bids and offers by the first user byrejecting an attempt by the first user to enter an additional bid oroffer when a rate of received bids and offers from the first userexceeds a predetermined limit. The predetermined limit for the firstuser may be set at 100 messages per second. The software may furtherinclude instructions for causing a computer to restrict a rate of entryof bids and offers by the second user by rejecting an attempt by thesecond user to enter an additional bid or offer when a rate of receivedbids and offers from the second user exceeds a predetermined limit. Thepredetermined limit for the second user may be set at 100 messages persecond. The software may further include instructions for causing acomputer to restrict an aggregate rate of entry of bids and offers byall users by rejecting an attempt by any user to enter an additional bidor offer when an aggregate rate of received bids and offers from allusers exceeds a predetermined limit. The predetermined limit for theaggregate rate may be set at 10,000 messages per second.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 illustrates an exemplary quote for calls and puts in selecteddelivery months for an equity option.

FIG. 2 illustrates a block diagram of a system for facilitating tradingof equity and index options according to a preferred embodiment of theinvention.

FIG. 3 is a flow chart that illustrates a method of facilitating tradingof equity and index options according to a preferred embodiment of theinvention.

FIGS. 4, 5, 6, and 7 are screen shots of live market data screens forselected equity and index options.

DETAILED DESCRIPTION OF THE INVENTION

The present invention addresses the blank screens shortcoming byproviding an incentive to market participants to publish relevantinformation relating to the fair value of the premium for equity andindex options to the electronic market. In so doing, the presentinvention provides an electronic market model that has the transparencyrequired to enable participants to deal with confidence. According to apreferred embodiment of the invention, this market model ischaracterized by the presence of two types of participants, hereinafterreferred to as “Primary Market Makers” (PMMs) and “Competitive MarketMakers” (CMMs). PMMs have obligations to quote tight spreads (i.e.,“bids” and “offers”) across all of the series within each class ofoptions to which they have been assigned, while CMMs have obligations inonly a limited number of series in each class of options to which theyhave been assigned. For example, in the case of the Amsterdam Exchange,which is part of Euronext.liffe, all Amsterdam-traded contracts (i.e.,classes) are grouped into Euronext.liffe Class Combinations (ECCs). Theselection for PMM and CMM capacity in a specific ECC is executed bysetting several obligation levels for which auctions are held annually.During the bidding rounds, applicants are invited to subscribe to thelevel of obligations they are willing to accept, for a position of PMMor CMM in the relevant ECC. At the end of the subscription procedure,Euronext.liffe evaluates the subscriptions and appoints the requirednumber of PMMs and CMMs, based on obligations and priority rules.Generally, these contracts have a duration of one year, and all ECCs arere-auctioned every year.

Referring to FIG. 3, a flow chart 300 illustrates a method of tradingequity and index options using a preferred embodiment of the electronicmarket model according to the present invention. This electronic marketmodel generates order flow from the retail market into equity and indexoptions by ensuring that tight prices are maintained in every optionstrike. This is achieved, as shown in step 305 of the flow chart 300, byincentivizing specialist market makers (i.e., PMMs and CMMs) to submittight bid/offer spreads across a wide range of strike prices within anumber of ECCs. However, such a market can only rely on PMMs and CMMs tosubmit tight spreads if the PMMs and CMMs are provided with theunderlying technology at the system level. This underlying technologyenables the PMMs and CMMs to have timely access to appropriate marketinformation, as further described below.

Referring to FIG. 2, a block diagram illustrates an electronic tradingsystem 200 according to a preferred embodiment of the present invention.The system includes one or more servers 205, also referred to as atrading host 205, and one or more interfaces 210, also referred to as anIndividual Trading Mnemonic (ITM) 210. The trading host 205 ispreferably implemented by the use of one or more general purposecomputers, such as, for example, a Sun Microsystems F15k. Each ITM 210is also preferably implemented by the use of one or more general purposecomputers, such as, for example, a typical personal computermanufactured by Dell, Gateway, or Hewlett-Packard. Each of the tradinghost 205 and the ITM 210 can include a microprocessor. Themicroprocessor can be any type of processor, such as, for example, anytype of general purpose microprocessor or microcontroller, a digitalsignal processing (DSP) processor, an application-specific integratedcircuit (ASIC), a programmable read-only memory (PROM), or the like. Thetrading host may use its microprocessor to read a computer-readablemedium containing software that includes instructions for carrying outone or more of the functions of the trading host 205, as furtherdescribed below.

Each of the trading host 205 and the ITM 210 can also include computermemory, such as, for example, random-access memory (RAM). However, thecomputer memory of each of the trading host 205 and the ITM 210 can beany type of computer memory or any other type of electronic storagemedium that is located either internally or externally to the tradinghost 205 or the ITM 210, such as, for example, read-only memory (ROM),compact disc read-only memory (CDROM), electro-optical memory,magneto-optical memory, an erasable programmable read-only memory(EPROM), an electrically-erasable programmable read-only memory(EEPROM), a computer-readable medium, or the like. According toexemplary embodiments, the respective RAM can contain, for example, theoperating program for either the trading host 205 or the ITM 210. Aswill be appreciated based on the following description, the RAM can, forexample, be programmed using conventional techniques known to thosehaving ordinary skill in the art of computer programming. The actualsource code or object code for carrying out the steps of, for example, acomputer program can be stored in the RAM. Each of the trading host 205and the ITM 210 can also include a database. The database can be anytype of computer database for storing, maintaining, and allowing accessto electronic information stored therein. The trading host 205preferably resides on a network, such as a local area network (LAN), awide area network (WAN), or the Internet. The ITM 210 preferably isconnected to the network on which the host server resides, thus enablingelectronic communications between the trading host 205 and the ITM 210over a communications connection, whether locally or remotely, such as,for example, an Ethernet connection, an RS-232 connection, or the like.

Typically, a PMM or CMM will use an ITM 210 to enable entry of orders(i.e., bids or offers) to the server 205. One type of order is known asa Market Making Order (MMO). Referring also to FIG. 3, at step 310, anMMO allows a trader, via his or her ITM 210, to submit simultaneous bidsand offers into an options series. The system 200 may providerestrictions on the use of MMOs. For example, within each derivativesproduct listed on the exchange, the trading host 205 may be programmedto accept entry of MMOs for that product only from ITMs that areregistered at the trading host level.

As shown in step 315, MMOs can be submitted in batches, allowing tradersto enter multiple bid and offer quotes into a contract. For example, inthe Amsterdam market, PMMs can preferably enter up to a maximum of 65bids and offers into a contract, as a single message. Alternatively, themaximum number of bids or offers entered by a PMM in a single messagemay be other than 65; for example, 100, 200, 500, or 1000. The tradinghost 205 then “unravels” the message (i.e., the trading host 205deconstructs the message into individual bids and offers), and thenpopulates the order book with the updated quotes from the PMM. CMMs,however, who have lesser obligations, are preferably limited to enteringup 7 MMOs as a single batch, or message. In an alternative embodiment,the maximum number of MMOs that may be entered by a CMM in a singlemessage may be varied; for example, the CMM maximum limit may be 10, 25,50, or 100, and it may be varied based on the PMM maximum limit, asdescribed above. This distinction is made to maintain the balancebetween PMM and CMM obligations, and to ensure there is a clearincentive to take on the extra risk of a being a PMM. Only registeredPMMs and CMMs are issued with MMO ITMs 210, thus providing them adistinct advantage over other users of automated trading tools, whotypically can only submit single orders into the marketplace.

As indicated in step 320, in a preferred embodiment, the presentinvention provides another advantageous feature, hereinafter referred toas the “delta protection” facility. Delta protection provides PMMs andCMMs with a degree of protection against being traded on multiple quotessimultaneously. In particular, the delta protection facility maintains acumulative delta position (i.e., a quantity related to the volume tradedvia the relevant PMM or CMM ITM 210) on the trading host 205 over thetrading day, on a contract or expiry basis, which is updated every timethe PMM or CMM trades. When the cumulative delta position exceeds apredetermined delta limit, the trading host 205 sends a message to warnthe trader and to provide the trader with the opportunity to withdrawall remaining MMOs (i.e., all untraded bids and offers) in that contractor expiry, or to inactivate all remaining orders by the systemimmediately once the limit is reached. For example, if for a designatedPMM, the delta limit has been set at 40 bids and offers out of the 65bids and offers that were entered by the designated PMM for a particularcontract, then once 40 bids and offers have been accepted, thedesignated PMM will be warned and provided an opportunity to withdrawthe remaining 25 offers and bids in that contract. Because this actionis taken at the trading host 205 level, no other market participant canactually trade with that ITM 210 beyond his delta limit, and thus thetrader is “delta protected”. Delta protection may be provided at boththe contract level (i.e., a complete stock or index option) and theexpiry level (i.e., the strike prices within an expiry month of a stockor index option).

Enabling the delta protection facility typically provides PMMs and CMMswith a degree of comfort, that any misconfiguration of their system thatcould lead to the entry of MMOs in the marketplace which are far fromfair value (i.e., bids that are too high or offers that are too low)will not, in turn, lead to them being “machine-gunned” out of themarketplace by another PMM or CMM, or by another user of the marketplacewho has detected the error. In the event that such a misconfiguration oftheir quotes leads to another PMM or CMM attempting to hit all theirbids, and/or lift all their offers, the delta protection facilityautomatically withdraws the orders from the trading host 205. In thismanner, the financial losses from such a situation can be predicted andcontrolled.

At steps 325 and 330, in a preferred embodiment, the present inventionprovides yet a further advantageous feature, hereinafter referred to asan interface “throttle”. An interface throttle has a number of keyaspects, including the following: 1) Limiting the number of orderssubmitted within a batch message, as indicated in step 325, and 2)restriction of the rate at which traders can enter messages into thetrading host 205, as indicated in step 330. For example, theEuronext.liffe market system trading host 205 includes a default settingwhich limits the number of orders, or messages per second, which can beinput by a normal trader. This default setting is 100 messages persecond (mps) for each individual interface or ITM 210; however, thedefault may be set at any number of messages per second deemedappropriate (e.g., the throttle may be set within the 10-5000 mpsrange). In addition, the Euronext.liffe market system has a defaultbatch setting of 16 “submit” messages and 64 “revise” messages—a“submit” message involves submitting a new “bid” or “offer” into themarketplace, and a “revise” message involves revising the price and/orvolume of an existing order. Again, the batch settings for “submit” and“revise” messages may be varied as appropriate; e.g., each batch settingmay vary within the range of 1-1000.

However, the incentive to PMMs and CMMs to maintain tight spreads acrossa wide range of options strikes may be reduced if they are aware thatnormal traders will have the ability to submit multiple bids or offersinto the marketplace. Thus, it may be desirable to set the throttle at alower limit, for example, 4 messages per second per contract, or anynumber of mps per contract in the 1-100 range. In addition, the throttlemay be set so as to effectively disable all batch submissions, or set toa maximum batch size of “1”. In this manner, PMMs and CMMs may regainconfidence that their ability to enter multiple quotes via the MMOfacility could not be matched by other traders using automated tools.

As described above, an electronic market model 200 according to apreferred embodiment of the invention is designed to attract order flowfrom the retail market, because PMMs and CMMs are incentivized to maketight bid/offer spreads, in every strike, in every expiry, for everyequity and index option. As an example, the Amsterdam market currentlylists approximately 45 equity options, on which are listed approximately100 strikes (there is some fluctuation up or down in these numbers asnew companies are listed or de-listed, or merged, etc.). Therefore, ifeach underlying equity has a price movement every second, each PMM andCMM assigned to an equity option will need to update his/her quotes,taking into account changes in intrinsic value of the equity option.Assuming that each Amsterdam equity option has at least two PMMsassigned to that option, they will therefore be generating a minimum or45×100×2=9000 market data updates per second. In addition, certainequity or index options may have larger numbers of strike prices andlarger numbers of PMMs or CMMs assigned to them, thus causing the numberof market data updates per second to rise significantly. Such amounts ofmarket data, for some customers, may be difficult to efficientlyprocess, particularly during volatile periods.

Referring again to FIG. 3, in a preferred embodiment of the presentinvention, an electronic market model provides an additional featuredesigned to alleviate difficulties relating to high data rates, asdescribed above. As indicated at step 335, this feature is referred toherein as a “market data control”. At the trading host 205 level, thetrading host 205 is programmed to recognize, for a particular market orcontract, the absolute market data output (also referred to as theoutbound stream). If the outbound stream exceeds a certain rate ofmessages per second, the market data control is activated so that apredetermined limit of, for example, 10,000 outgoing messages per secondis never exceeded. Alternatively, the outbound stream limit may be setas appropriate within the range of 1-5,000,000 outgoing messages persecond.

Market data controls may also be implemented at the interface 210 level.For example, in a preferred embodiment, the trading host 205 may beprogrammed to analyze individual “queues” which may be building atindividual interface 210 sessions. Typically, as in the exampledescribed above, high levels of market data may be generated undernormal conditions (e.g., approximately 9000 messages per second ormore). This can cause message queues to build, and hence result intraders “falling behind” the market. If the trading host 205 detects aqueue building at an individual interface 210 session level, a marketdata control may be automatically activated for that individualinterface session.

Referring again to FIG. 3, another feature provided by an electronicmarket model according to a preferred embodiment of the presentinvention is referred to herein as “summarization”, as indicated at step340. To perform summarization, the trading host 205 contains code thatautomatically looks for market data (i.e., bid and offer updates) whichcan be overwritten by more recent updates. For example, whenever a newbid or offer is made by any market participant at a different price thanthe previous order, that data will be summarized by the trading host205. In addition, the trading host 205 “coalesces” market data wherepossible. For example, new orders submitted at a price which alreadyexists in the order book will only result in a volume update. In thisway, the amount of market data sent by the trading host 205 at peaktimes is severely controlled, thus protecting market users. However,trade prices and an individual ITM's responses from the trading host 205are usually not summarized.

Each of the trading host 205 and the interface 210 has at least onemessage queue onto which messages are placed. In a preferred embodimentof the invention, the queue is a “black box” that will performsummarization of messages. Messages are inserted on to the queue and thequeue will handle the summarization and throttling itself. Theimplementation of the queue will enable the bulk of the queueimplementation to be shared between the interface 210 and the tradinghost 205. Information about which contracts can be summarized is sentfrom the trading host 205 to the interface 210. In addition, a throttlewill be implemented to enable the trading host 205 to reduce the numberof summarized messages sent. For example, a setting of 5000/s wouldallow a maximum of 5000 summarized messages every second to be availableto be sent out. In this manner, the throttle is used to reduce messageflow which may allow a queue to build up, thus causing moresummarization to occur.

The message queue acts like the normal queues, in that messages can beput on to the tail of the queue and removed from the head of the queue.However, this message queue contains throttling and summarizationalgorithms, as described above. Typically, each message contains aheader that includes a timestamp and commodity key. An example commoditykey is “POFTE”. The first character indicates the exchange code. Thesecond character is the generic contract type. The remaining threecharacters are the commodity code. Summarization is typically performedon a commodity key level, which is specified when the queue is initiallycreated, because it will not change during the day. Messages for thosecommodities not being summarized within the trading host 205 bypass thesummarizing queue and throttle mechanism. Although these messages arenot be subject to summarization, they still pass through the summarizingqueue and throttle mechanism.

The message queue uses a series of rules to determine when messages canbe summarized. For example, the rules may be used to determine whether anew OnMarketOrder should overwrite an earlier OnMarketOrder. If themessage is for a commodity that cannot be summarized, then that messageis processed unchanged. If the message is for a commodity for whichsummarization is enabled, then additional checks are performed,depending on the type of message. If the message is of a type thatcannot be summarized, then that message is inserted on the queueunchanged. If the message is part of a trade, then the state of themarket before the trade should not be overwritten. For example, when atrade occurs, the trading host 205 may send out several messages such as“OnMarketOrder” and “OnMarketUpdate”. The OnMarketOrder messages for thetrade should not be summarized with earlier OnMarketOrder messages, norshould later messages be summarized with these OnMarket Order messages.Accordingly, the messages for that trade are effectively “flushed” fromthe summarization queue.

A message queue may be flushed at appropriate times, i.e., the messagequeue may be completely cleared prior to handling future messages.Messages from the same series arriving after the flushing messagecontinue to queue up behind it, and they will not be sent out before theflushing message. A market update message with a trade price has aguaranteed delivery, in that it can not be overwritten or deleted in thethrottling process, and the original timestamp of the trade will,therefore, be retained. If a message of a summarizable type for acommodity where the summarization of messages is enabled is sent, thenthe trading host 205 checks the queue to determine if there are anymessages on the queue that the newly sent message can supersede. If so,the earlier message is replaced with the new message, subject to thetrade rules described above.

In addition, the message queue will allow “jumping” of messages (againsubject to the trade rules described above). Jumping refers to asituation such as the following: the OnMarketOrder for a best bid mightarrive either before or after the corresponding OnMarketUpdate,depending on the other messages in the queue at the time. Additionally,a trader who withdraws an order may receive the order book updates forthat withdrawal before the withdrawal order status message. An exceptionto this is the relationship between OnMarketUpdate andOnMarketImpliedUpdate for the same market. The trading host 205 can sendout an OnMarketImpliedUpdate message, if the price is at least as goodas the price in the OnMarketUpdate message. However, if the order booklater changes so that there is a better price in the OnMarketUpdate thanin the OnMarketImpliedUpdate, then the OnMarketImpliedUpdate can becompletely cancelled. Note that the sending of implieds for a particularmarket is configured on the trading host 205. Implied updates will besuperseded in the throttle queue if any of the following situationsoccurs: 1) The implied order is followed by a subsequent improvedexplicit order; 2) an improved implicit order is received, or the volumeof the implicit order changes; or 3) a subsequent OnMarketImpliedUpdatemessage arrives which cancels the original message (i.e., sell or buyprice set to zero). There is no series prioritization (i.e., prioritybased on which series is in the money or out of the money).

In addition, the trading host 205 ensures that all messages retain theirgiven timestamp. If message 1 is overwritten by or summarized withmessage 2, then the timestamp of message 2 is retained. This will resultin timestamps being out of sequence, but the timestamp relates to thetime the event happened, not the time that the message was sent out.

Referring to FIGS. 4-7, several exemplary market data screens are shown.These examples may be used to compare and contrast the quality of “onscreen” equity and index option markets according to a preferredembodiment of the present invention with the quality of markets forwhich a more traditional “market making” scheme is employed. All of theexamples shown in FIGS. 4-7 are extracted from “live” market datascreens from Bloomberg, and are dated and time stamped.

Referring to FIG. 4, a live market data screen for France Telecom isshown. In this example, a highly popular equity option, France Telecom,has a limited number of strike prices which are showing “bids” and“asks”. In particular, the market maker is only showing prices for whichcalculating option values is relatively easy, i.e., approximately equalto the “at the money” value, or very close to the current value of theunderlying stock. Bloomberg provides a representation of the currentunderlying value via the “Centre” price as shown at the top of thescreen. It may be seen that prices are only quoted in the “Calls” fromthe strikes 22 to 28, and in the “Puts” from strikes 25 to 31. Tradedvolume has only taken place in the 23 calls.

Referring to FIG. 5, a screen shot relating to the KPN equity option isshown. This option is listed on Euronext.liffe Amsterdam, and so issubject to an electronic market model according to a preferredembodiment of the present invention. In this example, market makers areposting bids and asks, across a wide range of strike prices. Forexample, the Bloomberg “centre” price is 6.89, yet active bids and asksare posted in multiple delivery months, and stretching as high as the9.00 strikes. Traded volume has taken place in the August 5 7.00 calls,the September 5 6.00 calls, the July 5 7.00 puts, and the September 56.50 puts. Referring also to FIG. 4, from a retail investor point ofview, far more information is available on screen for making a decisionabout taking a position in the KPN equity option than for making acomparable decision with respect to France Telecom.

Referring to FIG. 6, another example is shown for the CAC 40 IndexOption. The CAC 40 Index Options are currently not subject to anelectronic market model according to a preferred embodiment of thepresent invention. As can be seen, active bids and asks are posted fromthe 4200 to 4500 calls, and the 4050 to 4350 puts. Traded volume hasbeen active within this tight range.

Referring also to FIG. 7, another example is shown for the AEX IndexOption, which is listed on Euronext.liffe Amsterdam and therefore usesan electronic market model according to a preferred embodiment of thepresent invention. The AEX Index Option has active quotes throughout therange of prices that can be shown on the Bloomberg screen. In addition,particularly on the calls, traded volume has been active from the 320 to410 strikes. It is noted that where bids are shown as blank aboveagainst an offer of 0.05, market makers are effectively quoting abid/offer of 0 to 0.05. Thus, by comparing the relatively sparse amountsof information shown in FIGS. 4 and 6 with the relatively large amountsof information shown in FIGS. 5 and 7 (i.e., the improvement vis-à-visthe blank screens problem), the examples provided in FIGS. 4-7 show howthe deployment of Market Making Orders with delta protection, togetherwith multiple competing market makers, may lead to a better qualityon-screen market in popular equity and index options.

While the present invention has been described with respect to what ispresently considered to be the preferred embodiment, it is to beunderstood that the invention is not limited to the disclosedembodiments. To the contrary, the invention is intended to cover variousmodifications and equivalent arrangements included within the spirit andscope of the appended claims. The scope of the following claims is to beaccorded the broadest interpretation so as to encompass all suchmodifications and equivalent structures and functions.

1. A system for facilitating trading of equity and index options, eachoption being assigned to a class, each class including a plurality ofpredetermined series of options, and the system comprising: a server atwhich each option is actively traded; and an interface in communicationwith the server, the interface being configured to enable at least oneof a bid and an offer for an option to be entered, wherein the server isconfigured to receive bids and offers for each option via the interface,and wherein the interface is further configured to enable a first userto simultaneously enter a plurality of bids and offers within a singlemessage, wherein the number of entered bids and offers is not greaterthan a first maximum, and wherein a quote for each bid or offer isrequired to fall within a first predetermined range of values for allseries within the class; and wherein the interface is further configuredto enable a second user to simultaneously enter a plurality of bids andoffers within a single message, wherein the number of entered bids andoffers is not greater than a second maximum, and wherein a quote foreach bid or offer is required to fall within a second predeterminedrange of values for a predetermined set of series within the class, thepredetermined set not including all series within the class; and whereinthe interface is further configured to enable a third user to enter anindividual bid or offer within a single message with no restriction on aquote for the entered bid or offer; and wherein when at least one bid oroffer entered by the first user results in a trade, the server isfurther configured to compute a delta corresponding to a trade, thedelta being selected from the group consisting of a volume of the tradeand a total number of bids and offers associated with the trade; and,when a subsequent at least one bid or offer entered by the first userresults in a subsequent trade, the server is further configured to tracka first user cumulative delta by adding a delta corresponding to thesubsequent trade to a sum of the previous deltas; wherein, when thefirst user cumulative delta exceeds a predetermined delta limit, theserver is configured to enable the first user to withdraw alloutstanding bids and offers that were simultaneously entered by thefirst user.
 2. The system of claim 1, wherein when at least one bid oroffer entered by the second user results in a trade, the server isfurther configured to compute a delta corresponding to a trade, thedelta being selected from the group consisting of a volume of the tradeand a total number of bids and offers associated with the trade; and,when a subsequent at least one bid or offer entered by the second userresults in a subsequent trade, the server is further configured to tracka second user cumulative delta by adding a delta corresponding to thesubsequent trade to a sum of the previous deltas; wherein, when thesecond user cumulative delta exceeds a predetermined delta limit, theserver is configured to enable the second user to withdraw alloutstanding bids and offers that were simultaneously entered by thesecond user.
 3. The system of claim 1, wherein the server is furtherconfigured to restrict a rate of entry of bids and offers by the firstuser, wherein when a rate of received bids and offers from the firstuser exceeds a predetermined limit, the server is configured to rejectan attempt by the first user to enter an additional bid or offer.
 4. Thesystem of claim 3, wherein the predetermined limit is 100 messages persecond.
 5. The system of claim 1, wherein the server is furtherconfigured to restrict a rate of entry of bids and offers by the seconduser, wherein when a rate of received bids and offers from the seconduser exceeds a predetermined limit, the server is configured to rejectan attempt by the second user to enter an additional bid or offer. 6.The system of claim 5, wherein the predetermined limit is 100 messagesper second.
 7. The system of claim 1, wherein the server is furtherconfigured to restrict an aggregate rate of entry of bids and offers byall users, wherein when an aggregate rate of received bids and offersfrom all users exceeds a predetermined limit, the server is configuredto reject an attempt to enter a bid or offer by any user.
 8. The systemof claim 7, wherein the predetermined limit is 10,000 messages persecond.
 9. A method of trading of equity and index options, each optionbeing assigned to a class, each class including a plurality ofpredetermined series of options, and the method comprising the steps of:using a computer to receive from a first user a plurality of bids andoffers for options assigned to the class within a single message,wherein the number of received bids and offers is not greater than afirst maximum, and wherein a quote for each bid or offer is required tofall within a first predetermined range of values for all series withinthe class; using the computer to receive from a second user a pluralityof bids and offers for options assigned to the class within a singlemessage, wherein the number of received bids and offers is not greaterthan a second maximum, and wherein a quote for each bid or offer isrequired to fall within a second predetermined range of values for apredetermined set of series within the class, the predetermined set notincluding all series within the class; using the computer to receivefrom a third user an individual bid or offer for an option assigned tothe class within a single message with no restriction on a quote for thereceived bid or offer; and using the computer to complete a trade bymatching a bid to a corresponding offer; and using the computer to tracka cumulative delta for the first user by adding a delta corresponding toa completed trade whenever a bid or offer received from the first useris matched, the delta being selected from the group consisting of avolume of the trade and a total number of bids and offers associatedwith the trade; and when the first user cumulative delta exceeds apredetermined delta limit, using the computer to provide an option tothe first user to withdraw all outstanding bids and offers that weresimultaneously received from the first user.
 10. The method of claim 9,further comprising the steps of: using the computer to track acumulative delta for the second user by adding a delta corresponding toa completed trade whenever a bid or offer received from the second useris matched, the delta being selected from the group consisting of avolume of the trade and a total number of bids and offers associatedwith the trade; and when the second user cumulative delta exceeds apredetermined delta limit, using the computer to enable the second userto withdraw all outstanding bids and offers that were simultaneouslyreceived from the second user.
 11. The method of claim 9, furthercomprising the step of using the computer to restrict a rate of entry ofbids and offers by the first user by rejecting an attempt by the firstuser to enter an additional bid or offer when a rate of received bidsand offers from the first user exceeds a predetermined limit.
 12. Themethod of claim 11, wherein the predetermined limit is 100 messages persecond.
 13. The method of claim 9, further comprising the step of usingthe computer to restrict a rate of entry of bids and offers by thesecond user by rejecting an attempt by the second user to enter anadditional bid or offer when a rate of received bids and offers from thesecond user exceeds a predetermined limit.
 14. The method of claim 13,wherein the predetermined limit is 100 messages per second.
 15. Themethod of claim 9, further comprising the step of using the computer torestrict an aggregate rate of entry of bids and offers by all users byrejecting an attempt by any user to enter an additional bid or offerwhen an aggregate rate of received bids and offers from all usersexceeds a predetermined limit.
 16. The method of claim 15, wherein thepredetermined limit is 10,000 messages per second.
 17. A storage mediumfor storing software for facilitating trading of equity and indexoptions, each option being assigned to a class, each class including aplurality of predetermined series of options, the software beingcomputer-readable, wherein the software includes instructions forcausing a computer to: receive from a first user a plurality of bids andoffers for options assigned to the class within a single message,wherein the number of received bids and offers is not greater than afirst maximum, and wherein a quote for each bid or offer is required tofall within a first predetermined range of values for all series withinthe class; receive from a second user a plurality of bids and offers foroptions assigned to the class within a single message, wherein thenumber of received bids and offers is not greater than a second maximum,and wherein a quote for each bid or offer is required to fall within asecond predetermined range of values for a predetermined set of serieswithin the class, the predetermined set not including all series withinthe class; receive from a third user an individual bid or offer for anoption assigned to the class within a single message with no restrictionon a quote for the entered bid or offer; and complete a trade bymatching a bid to a corresponding offer; and track a cumulative deltafor the first user by adding a delta corresponding to a completed tradewhenever a bid or offer received from the first user is matched, thedelta being selected from the group consisting of a volume of the tradeand a total number of bids and offers associated with the trade; andwhen the first user cumulative delta exceeds a predetermined deltalimit, provide an option to the first user to withdraw all outstandingbids and offers that were simultaneously entered by the first user. 18.The storage medium of claim 17, wherein the software further includesinstructions for causing a computer to: track a cumulative delta for thesecond user by adding a delta corresponding to a completed tradewhenever a bid or offer entered by the second user is matched, the deltabeing selected from the group consisting of a volume of the trade and atotal number of bids and offers associated with the trade; and when thesecond user cumulative delta exceeds a predetermined delta limit,provide an option to the second user to withdraw all outstanding bidsand offers that were simultaneously entered by the second user.
 19. Thestorage medium of claim 17, wherein the software further includesinstructions for causing a computer to restrict a rate of entry of bidsand offers by the first user by rejecting an attempt by the first userto enter an additional bid or offer when a rate of received bids andoffers from the first user exceeds a predetermined limit.
 20. Thestorage medium of claim 19, wherein the predetermined limit is 100messages per second.
 21. The storage medium of claim 17, wherein thesoftware further includes instructions for causing a computer torestrict a rate of entry of bids and offers by the second user byrejecting an attempt by the second user to enter an additional bid oroffer when a rate of received bids and offers from the second userexceeds a predetermined limit.
 22. The storage medium of claim 21,wherein the predetermined limit is 100 messages per second.
 23. Thestorage medium of claim 17, wherein the software further includesinstructions for causing a computer to restrict an aggregate rate ofentry of bids and offers by all users by rejecting an attempt by anyuser to enter an additional bid or offer when an aggregate rate ofreceived bids and offers from all users exceeds a predetermined limit.24. The storage medium of claim 23, wherein the predetermined limit is10,000 messages per second.